F UND A ME N TA L S Semi-Annual Magazine - Vol 5 (Jan - Jun 2011)

Smart Ideas
for money
management

One SIP at a
time: Smart
way of
growing
your wealth

Portfolio Strategy
Jan-Jun 2011

Islamic Saving
Options

Trust the Experts!

Call 0800-00026 SMS ‘INVEST’ to 8258
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Asset Management Companies in Pakistan.
 F UND A ME N TA L S
Features
02 Smart Ideas for Money
Management
You get your salary at month end, what do you do next?
Chances are that you let it lie in your bank account and
withdraw as and when you need it throughout the month.
It may be hard to believe but for many of us, there is still
some money left in the bank account at the time when
our next pay cheque arrives. The money resting in the
bank earns no or negligible return.
04 Portfolio Strategy 2011
A follow-up of the article “Portfolio Strategy” published
in the previous issue of Fundamentals, in this feature,
Hasnain Raza Nensey, Chief Investment Officer (CIO), does
a performance review of the investment portfolios
recommended for the last 6 months (Jun-Dec 2010) and
suggests new portfolio allocations and readjustments for
Jan-Jun 2011.
09 One SIP at a time
Maleeha Bangash, Chief Strategy Officer (CSO), draws
from her international experience in the Asset
Management industry and explains the smart way of
growing your wealth one SIP at a time. When presented
with a steaming, aromatic cup of tea, there are two ways
to savor it - gulp it down at a go, or drink it sip by sip.
Needless to say, the easier and immensely enjoyable way
would be one sip at a time. “SIP” is also the smarter way
for investors to grow their wealth.
13 Islamic Saving Options
The crux of Islamic investments is sharing of risk and
exclusion of fixed or pre-determined interest products. In
Islamic finance, profits only come at the cost of risk
exposure but excessive risks and uncontrollable and
uncertain obligations are also forbidden.
UBL Funds News
UBL Fund Managers
Launches two Income Schemes
Launched in October 2010, UBL Savings Income Fund
(USIF) is an open-end income scheme that is designed
for investors looking to earn a stable and competitive
stream of income on their savings in the short to
medium-term. The scheme achieves this objective by
investing in instruments such as Government securities
and bank deposits.The scheme has given a return of
11.58% p.a. since its launch.
Launched in November 2010, UBL Islamic Savings Fund
(UISF) is an open-end Shariah-compliant income scheme
that is designed for investors looking to earn ‘Halal’
income on their savings. The scheme invests in Shariah-
compliant instruments including Islamic Government
securities (such as Ijarah Sukuks) and Islamic bank deposits.
The scheme has given a return of 11.84% p.a. since its
launch.
UBL Fund Managers
First AMC to become GIPS compliant
In December 2010, UBL Fund Managers announced
adoption of the Global Investment Performance Standards
(GIPS) for its funds’ performance reporting, becoming
the first Asset Management Company (AMC) in Pakistan
to implement GIPS compliant reporting standards.
Developed by the CFA Institute, GIPS provide an ethical
foundation and self-regulated means to communicate
performance figures to prospective and current clients
so that they can make informed investment decisions.
 By Asad Raza Bhojani
Manager UBL Pension Schemes

You get your salary at month end, what do you do next? Chances are that
you let it lie in your bank account and withdraw as and when you need it
throughout the month. It may be hard to believe but for many of us, there is
still some money left in the bank account at the time when our next pay cheque
arrives. The money resting in the bank earns no or negligible return.

Welcome Money Market Funds What about the return?

With little or no extra effort and just a little discipline, you can
quite easily earn a decent return on your cash. This can be
achieved through investments in what are known as Money
Market Funds (or schemes).
An investor should always ask three basic questions whenever
an investment proposal is presented to him or her; ‘What about
the security of my capital?’, ‘What about the return?’ and finally,
‘How can I get my money back should I need it?’ We present
the answers to these questions for Money Market Funds through
a comparison with your typical bank account.
What about the security of my capital?
A Money Market Fund invests a minimum of 70% of its assets
in securities issued by the Government of Pakistan. In terms of
credit rating, these securities can be categorized as AAA. The
balance is generally deposited with high quality banks with a
credit rating of AA or better. On the other hand, in most cases,
the bank that you maintain an account with would have a credit
rating of AA or lower. Therefore, the security of your capital
through a Money Market Fund is better than that available with
your bank.
When your cash is lying in a current account of a bank, you do
not earn any return on it. If instead, the cash is deposited in a
savings account, you are likely to earn a return of around
5-8% per annum. In the current interest rate environment in
the country, Money Market Funds are yielding a return between
11-12% per annum.
The return on Money Market Funds is mostly tax-free (subject
to conditions), while individuals are taxed at a rate of 10% on
the return earned on a savings account. Additionally, an investor
is able to reclaim up to Rs. 75,000 through tax credit by investing
in these funds. This makes the overall return on Money Market
Funds considerably higher than that available by putting your
money in a bank account.
How can I get my money back should I need it?
Accessing your money through a Money Market Fund is easy.
You do not invest for a fixed time period and the fund
management company is able to return your money along with
the accrued profit within three days of your request. Some
funds even offer a same day redemption facility to investors i.e.
if you file a request to get your money back in the morning,

FUNDAMENTALS - Investor Magazine 02

your account will be credited the same day. On the other hand,
a minimum deposit period may be required to avail the rates
offered by banks.
How to make the best use of Money Market Funds?
Now that we have determined why Money Market Funds are a
fruitful and safe medium to invest, we discuss two approaches
that investors could employ to make the best use of their idle
cash.
For a regular saver
Suppose you earn Rs. 100,000 every month and through your
experience you know that on average you spend around
Rs. 90,000 each month. At the time you receive your salary, you
can set aside Rs. 10,000 to be invested in a Money Market Fund.
Such an approach would result in disciplined saving and also
generate a return on your cash that was effectively lying idle
previously. Following this strategy, an investor would end up
saving Rs. 120,000 in a year and those savings would have
accumulated a profit of around Rs. 7,150, assuming an overall
return of 11% during the year. Based on your income tax bracket,
you could also receive a tax credit of Rs.12,000 for the year.
Of course, if you find yourself spending more than Rs. 90,000
and need cash, you can easily withdraw from your investments.
For a non-saver
If you find yourself spending the entire Rs. 100,000 that you earn
in the month, you could still generate a decent return on this
amount. It is unlikely that you would be spending the entire salary
in the first week of the month. So an alternative would be to set
aside say Rs. 50,000 in a Money Market Fund as soon as you
receive your salary with the intention of withdrawing your
investments in the middle of the month when you would need
the cash.
If such a strategy is followed, whereby the individual is invested
in a Money Market Fund for just 15 days every month, he would
be invested for a total of 180 days over the course of the year.This
would result in him/her making around Rs. 2,500 over the year
by just managing his/her money smartly.

Smart Saving Tips For Your Money

Don’t keep your Unlock the potential

money idle - make it of your savings.
work for you.
Invest your savings in income
Keeping your money idle doesn’t schemes, compared to
earn you any return. Place your traditional deposits they offer
cash in money market schemes competitive returns and no
to earn healthy returns with easy
access.

Start investing early!

Save taxes the legal
way! Don’t make excuses - if you
don’t have a big amount to
Invest your money in a mutual invest, start with what you can
fund scheme and get significant manage and try doing it
tax savings based on your regularly!
income tax bracket.
 Portfolio Strategy 2011 By Hasnain Raza Nensey

For regular readers of “Fundamentals”, the “Portfolio Strategy” article needs no introduction. For
Chief Investment Officer

new readers, this is where we recommend portfolio asset allocations for investors of different risk
profiles while also reviewing the performance of the portfolios we have recommended in the past.

Our recommended portfolios have generated impressive returns Absolute Return

and have benefited several readers who practically implemented (Jul - Dec 2010)
the strategies and came back to us with their success stories. Equities 21.87%
For readers who have yet to take the first step towards building Fixed Income:
their portfolio, there is no better time than now! - Term-deposits 5.75%
- Income Funds -1.67%
Let’s begin by first reviewing the performance of the portfolios - GoP Schemes 6.25%
we recommended for the last 6 months (Jul - Dec 2010). The Real Estate 1.09%
return generated by the 3 portfolios are given in the table below. Commodities (Gold) 13.30%
After that, we move on to reviewing developments across Cash (Money Market Funds) 5.65%
various asset classes, and on page 6, we recommend fresh
portfolio recommendations for Jan-Jun 2011.
The recommended portfolios have performed well versus the
investible asset classes - with the “Aggressive” and “Moderate”
portfolios successfully capturing the buoyant mood prevalent
Performance Review of Recommended in the markets during the period Jul-Dec 2010. The performance
Portfolios of the conservative portfolio was relatively subdued, mainly due
to the weak performance from the “Income Funds” asset class.

Following is a snapshot of the returns generated by the portfolios

we have recommended since the time we started writing this
6-Month Absolute Return article in January 2009.
July - December 2010

Conservative Moderate Aggressive 2-Year Absolute Return

Portfolio Portfolio Portfolio
January 2009 - December 2010
3.8% 8.9% 12.3%
Conservative Moderate Aggressive
Portfolio Portfolio Portfolio
Individual returns (Jul-Dec 2010) for the asset classes that make
up the portfolios, are shown in the table on the top right.
23.9% 40.5% 50.5%

FUNDAMENTALS - Investor Magazine 04

The aggressive portfolio has generated the highest return (50%);
however this has come at the cost of higher volatility of about
5.27% (annualized). The moderate portfolio offers slightly lower
return (40%) while reducing the volatility to a much more
manageable level of 3.27% (annualized). The conservative
portfolio reduces the volatility to a mere 2.5% (annualized) while
sacrificing return but still generating a much respectable 24%
in the Jan - Dec 2010 period.
We have used annualized “Standard Deviation” as the measure
of volatility. If you compare with the last issues, the volatility of
portfolios has declined – this is the result of availability of longer
historical data of portfolio returns which improves confidence
in consistency of returns.
Developments across various asset classes
and their future outlook
Equities
Risk: High | Return: High | Investment Horizon: 2Y – 5Y
KSE100-index generated an absolute return of 21.9% during
the period (1 July ‘10 to 28 Dec ‘10). The impressive return
compensated for the subdued performance of the asset class
during the prior six months (Jan-Jun 2010) when the return was
a mere 3.6%. The healthy consolidation in the earlier six months
led to a strong rally in local equities, fuelled by growing foreign
investor interest and healthy corporate earnings. The domestic
equities are trading in-line with historic average PE (FY11E)
valuation of 8.0x – therefore we maintain our expectations for
a 20% annual return from equity markets on the conservative
side. The systematic risk and uncertainties will continue to add
noise to the basic fundamentals; however, we have seen in the
last two years that over the long-term the price levels are dictated
by fundamentals rather than by the rumor-mill.
Global equity markets had corrected and consolidated during
the prior six months (Jan-Jun 2010) and were poised to rally
during Jul-Dec 2010. Investor sentiment regarding economic
recovery improved and money gradually shifted from risk-averse
money market funds into risky asset classes like emerging market
equities in search of high returns. The developed markets
performed better than emerging markets with S&P500 and
FTSE both gaining 22% during the period. European markets
also rallied as investor concerns regarding Greece subsided with
DAX (Germany) and CAC (France) gaining 17% and 12%. The
performance of major world indices can be summarized by the
MSCI indices, where MSCI-ACWI (All Countries World Index)
Return versus Risk of various Asset Classes
50%
40%
Return (Annual)
30% Commodities
Moderate Aggressive
Portfolio
Portfolio
20%
GoP Schemes
Term deposit
Real Estate
Cash Conser vative
10%
Portfolio Income Funds
0%
0% 5% 10% 15%
Risk
and MSCI-EMI (Emerging Market Index) gained 22.5% and
22.6% during the period Jul-Dec 2010 respectively. On valuation
basis, the regional peers as well as global developed markets
are trading in the PE range of 13x-16x. Therefore, Pakistani
equities trade at a significant discount to regional peers – this
can generate substantial foreign interest if Pakistan’s risk
perception improves.
Fixed Income
Risk: Low | Return: Moderate | Investment Horizon: 6M – 1Y
Term Deposits
At the time of publication of our last issue (6 months ago),
rates for 6-month TDRs offered by AA category banks were in
the 10.75% - 11.5% (annualized) range. However, after the
recent hikes in the discount rate and the State Bank of Pakistan’s
shift towards a tighter monetary policy, the TDR rates have also
risen to the 12.5%-13.5% range. The year-end deposit raising
efforts have also played a role in the improvement in TDR rates.
The low risk nature of these placements, easy accessibility and
expectations of interest rate environment peaking out in the
near future justify some exposure in this asset class.
Income Funds
In the past year, Income Funds have come to be divided into two
broad categories, Aggressive Income Funds and Non-Aggressive
or simply 'Income Funds' - the differentiation between the two
is in their portfolio constituents. While Income Funds generally
have no exposure to corporate bonds (Term Finance Certificates,
TFCs), aggressive income funds can have varying degree of
exposure to such long-term debt instruments. Since investors
these days look towards a stable return from their income funds,
we recommend investments in ‘Non Aggressive’ Income Funds
that are largely invested in Government Securities and high-
yielding bank deposits and have no exposure to Term Finance
Certificates (TFCs) - thus reducing volatility in returns.
Government of Pakistan (GoP) Schemes
In our last issue, we recommended the “National Savings Bonds”
(NSB) which yield a 12.5% p.a. for a 3-year instrument. Since
then, State Bank of Pakistan has ordered primary dealers to
provide retail investors with access to direct investment into
T-Bills and PIBs. After the recent spate of monetary tightening,
1Y T-bill and 3Y PIB yields currently stand at 13.65% and 14.15%
p.a. respectively. Although accessibility to these instruments to
investors may be limited at this point, they are our preferred
choice for investors who can invest in these instruments after
considering the tax implications with their investment advisors.
Return Vs Risk of
Equities
Various Asset Classes
July - December 2010
The chart on the left shows how the
portfolios we recommended for the
period Jul-Dec 2010 achieved the
desired Risk / Return mix using the
available asset classes.
Diversification in the portfolios helped
reduce risk and added to the
portfolio’s return per unit risk.
20% 25%
 Real Estate Cash
Risk: Moderate | Return: High | Investment Horizon: 10Y Risk: Low | Return: Low | Investment Horizon: 3M - 6M

Lack of transparency in the Real Estate market is a major obstacle
in calculating Real Estate returns. We have estimated the return
of the asset class through inflation data collected by the Federal
Board of Statistics. According to the data, the Real Estate index
(Building & Construction material) rose from 220.3 (Jun 2010)
to 222.7 (Nov 2010), generating an absolute return of 1.09%
during the period. However, the figure can be misleading as the
actual volume of Real Estate transactions is very low due to
liquidity constraints.
We recommended Money Market funds for parking liquidity.
These funds are structured to return yields similar to the prevailing
interest rate environment. Therefore, with the rise in discount
rate over the last month, the yield of this asset class has also
improved. The stable returns of these funds also provide a hedge
against the volatile nature of local capital markets.

We recommended exposure in the Real Estate asset class with

a long term view and we continue to believe that the asset class
offers exceptional value for long-term investors, especially as a
hedge against inflation. Pakistan’s demographics, young,
growing population and urbanization are the key factors behind
our stance on this asset class.

Commodities (Gold)
Risk: Moderate | Return: High | Investment Horizon: 1Y

Gold prices have gained from USD1,241/oz (Jun 2010) to

USD1,406/oz (Dec 2010) during the period, generating an
absolute return of 13.3%. Gold, and commodities in general,
rallied strongly during the period as they are considered a hedge
against economic turmoil and currency volatility. Our earlier
fears of high future inflation and devaluation of paper money
resulting from the sharp increase in money supply due to
government sponsored bail-out packages seem to be coming
true. Simultaneous rise in prices of otherwise complementing
asset classes such as Equities and Gold are a clear hint that the
driving force is the expected devaluation of paper money in
general.

Portfolio Recommendations for January - June 2011

Conservative Portfolio Moderate Portfolio Aggressive Portfolio

Cash, 15% Cash, 10% Equities, 25% Cash, 5% Equities, 40%

Commodities Commodities
(Gold), 10% (Gold), 15%

Real Estate,
Income 15% Real Estate,
Funds, 30% 15%

Income Funds,
GoP Schemes, Income Funds, GoP Schemes,
10%
GoP Schemes, 55% 20% 20% 15%
Benefits of investing
in mutual funds By: Colin Miranda, Research Analyst

Diversification By dividing your funds evenly between the two stocks, you would
One of the primary benefits of investing in a mutual fund is the attain a modest return of 6% while significantly reducing the
high level of diversification that can be achieved. Diversification overall risk to which you would be exposing yourself.
refers to a technique that is often used by professional investors
to reduce the overall risk that is inherent in their investment Thus, diversification is the opposite of "putting all your eggs in
portfolio. Consider the table below: one basket"; in the equity markets, this is achieved by purchasing
stocks of a variety of companies in different sectors of the
economy e.g. oil and gas production, banks, power generation
Weights and so on. In the debt markets, diversification can be attained
by spreading investments across instruments with different tenors
Return 1 2 3
and instruments with different credit-ratings. Furthermore, by
Stock A 20% 100% 50% 0% purchasing units of a composite fund i.e. a fund that invests in
Stock B -8% 0% 50% 100% fixed-income instruments as well as equities, you can also achieve
cross-asset diversification. Doing this on their own for the
Portfolio Return 20% 6% -8% individual investor can be quite costly. However by investing in
mutual funds, investors are provided with the immediate benefit
of instant and cost-effective diversification and asset allocation
The second column in the table indicates the return generated
without the large amounts of cash needed to create ones own
by the two stocks, A and B, respectively in a particular year. In
individual portfolios.
the third column, we see the return that you could realize if you
were to place all (100% of) your funds in Stock A; however,
achieving this rate of return would expose you to a high level Professional Investment Management
of risk, and you would also have to carry out extensive research As mentioned earlier, in order to maximize the returns on your
in order to find stocks whose price would rise by 20% within investments, thorough research is necessary. However,
one year. Conversely, if you were to invest all (100% of) your conducting that research will most likely take up a significant
funds in Stock B, you would suffer a loss of 8% on your amount of your precious time. All investment actions in mutual
investment (as indicated in the last column). The middle ground funds are backed by thorough research that includes analysis of
is to distribute your investments across stocks A and B. economic trends, identification of sectors that are poised for

FUNDAMENTALS - Investor Magazine 07

growth and picking stocks that are likely to rise in the future.
Therefore, rather than having to spend vast amounts of time
thoroughly researching every investment before you decide to
buy or sell, you have a mutual fund's research team who will
manage it for you. In addition, the need for professional
management is acute when investing in volatile economic
conditions; the fund manager can adjust the funds’ allocations
and make it well-positioned to maximize returns in the times
ahead.
the need for cash, you can choose to automatically reinvest
dividends or capital gains on your investments; doing so would
compound the rupee-return on your investment.
As an added feature, most mutual funds allow you to shift your
investments from one fund to another. For instance, if you feel
that you could earn a higher return in the stock market than the
money market, you can instruct the Asset Management Company
to convert your liquid-fund units to stock-fund units.

The role of professional management comes to the forefront in Economies of Scale

the case of fixed-income investments. Let's say you wish to take
Whenever you buy or sell a stock, you will have to pay a nominal
advantage of the high yield on corporate debt when interest
percentage of the value of the transaction as "brokerage" fee.
rates are high. Since corporations rarely seek debt financing from
Usually, the brokerage rate charged to individual investors is higher
the general public, the only way you can gain exposure to
than the rate charged to institutional investors, because the
corporate debt is to purchase units of a fixed income fund. When
average volume of the individual investor's transaction is
interest rates decline, you could potentially realize a handsome
significantly lower than that of an institutional investor’s.
gain on your investment due to the rise in prices of the underlying
TFCs (Term Finance Certificates).
By purchasing units of a mutual fund, individual investors can
avoid the high transaction fees they would have had to pay if they
Liquidity were to set up their own investment portfolios. Investors would
Liquidity refers to the ease with which you can buy and sell financial also save on the transaction costs they would have incurred when
instruments. By contrast, units of mutual funds can be purchased periodically adjusting their portfolio allocations.
and redeemed with the utmost ease, which ensures that you
can enter and exit the market when they see fit or whenever the
need for cash arises. Some money market funds also offer a
same-day redemption facility; such funds provide superior liquidity,
allowing you to take out your money whenever you need it.
Furthermore, Asset Management Companies that have strong
backing from a financially sound institution are capable of
redeeming your units even in the most dismal market conditions,
thus ensuring that your liquidity needs are met at all times.

Convenience & Flexibility

Most mutual funds have a wide distribution network, allowing
you to purchase units easily. In addition, once you have made
your investment in the fund(s) of your choice, you can subsequently
access your updated account information and transaction history
online, usually at no extra charge. Furthermore, if you don't feel
 One SIP
at a Time
The smart way for
investors to grow their wealth
By Maleeha Mimi Bangash
Chief Strategy Officer
When presented with a steaming, aromatic cup of tea, there are two
ways to savor it - gulp it down at a go, or drink it sip by sip. Needless
to say, the easier and immensely enjoyable way would be one sip at
a time…
A Cup of Tea
Growing one's wealth is akin to drinking a cup of tea. The two
common routes to growing wealth are either making a lump-
sum investment at a point in time, or the easier way of investing
small amounts in a systematic manner, similar to consuming that
gratifying cup of tea, taking "one sip at a time" - that is, through
predetermined small investment amounts at fixed intervals. The
latter approach is widely practiced when we consider investments
in mutual funds.
As far as investments and growing wealth are concerned, if due
to lack of substantial funds for one-time investment, building
wealth is not a small saver’s “cup of tea”, then the most effortless
way to grow wealth is by opting for SIP.
What is SIP?
SIP (short for "Systematic Investment Plan") refers to a
methodology whereby investors decide to invest in mutual funds
through small investment amounts for which certain parameters
and conditions are pre-decided. This includes the frequency of
investment i.e. monthly or quarterly, the amount (usually fixed)
and the mode. Even though an investor can choose to make
investments on their own, the easier and more successful method
is to have the fund manager make an arrangement for regular
investments into an asset allocation best suited to the risk appetite
of the investor, which ensures that the investors' needs and
financial objectives are met in a timely manner.
FUNDAMENTALS - Investor Magazine
Internationally, this arrangement is set up and executed by fund
managers as an additional service to the investor. This is done
by the investor providing an explicit mandate to the fund manager.
This mandate can be executed by the fund manager by means
of a Direct Debit from a bank account on a specified date, for a
specific amount which is then invested into the mutual funds.
Alternatively, postdated checks can also be provided by the
investor where preferred.
Benefits of SIP
Rupee Cost Averaging
Nearly all investors have heard that it is better to “buy when the
prices are low and sell when the prices are high”. However, this
remains an elusive method for the majority. Even highly
experienced and prolific investors find themselves unable to
“time the markets” effectively.
However, by investing a fixed sum systematically, at regular
intervals, investments are made both at the “highs” and the
“lows”. Over a period of time, there is an averaging effect which
benefits the investor and makes “timing the markets” irrelevant.
This is known as Rupee-Cost Averaging.
Power of Compounding
SIP allows investors to commence their investments with small
amounts and without experiencing a financial crunch, as
compared to lump-sum investments. If held over a period of
09
time, this will generate continuous earnings in the form of profits resumed as and when the investor is able to do so. Furthermore,
or dividends. When these profits are in turn ploughed back or the investment amount can be varied and profit redeemed
reinvested, they help in exponential principal growth due to the anytime, without any extra charges.
compounding effect.
Who should invest through SIP
This can be seen in the simple example below. Not only the salaried class but SMEs (Small & Medium Enterprises)
and small corporations can also potentially sign up for Systematic
Suppose an investor decides to invest in a SIP, starting with Investment Plans. This avenue is ideal for people with medium to
Rs. 5,000 and adding the same amount every month. In a long-term financial objectives. Medium-term objectives include
moderate portfolio, with 50% investment in equity and 50% in going for pilgrimage, planning a vacation or buying a car; long-
the money market, the returns would increase remarkably with term objectives include a child’s education and planning a child’s
the investment time horizon. In five years, his principal would wedding. It is notable that SIP avenues are also available for
grow by 41%; in ten years by 120%; and in fifteen years it would Shariah-compliant investment solutions.
grow to more than triple the principal amount invested. This is
highlighted in the chart below. International Popularity
Internationally, smaller ticket investors are increasingly moving
towards SIP as the ideal approach to building wealth.
Amount Invested:
Rs. 900,000 A similar methodology is Dollar Cost Averaging, practiced widely
Portfolio Value: in U.S.A., where it is used to invest directly in the stock market.
Rs. 2,725,000 A fixed dollar amount is invested at regular periods of time, so
that shares are bought when prices are low and when prices are
high. Thus, the average cost per share of investment is lower and
over time, as the shares appreciate in value; the profits/gains are
higher which can then be realized by the investor at an opportune
time. The approach also reduces the risk of investing a large
Amount Invested: amount when the shares are overpriced.
Rs. 600,000
Portfolio Value: The example most pertinent to our savings and investment culture
Rs. 1,220,000 is that of India, which has a considerable population of small
investors. Recent reports show that in 2010, 100,000 new SIP
Amount Invested: accounts were opened, and the number of fresh SIP accounts
Rs. 300,000 showed an enormous increase of 160% over the past one year.
Portfolio Value: In India, non-metropolitan cities and micro investors (with amounts
Rs. 422,000 under Rs. 1,000) are showing an increasingly greater interest in
SIP. Market share for non-metropolitan investors has gone up
from 33% to 36%, and for micro investors from 13% to 16%.
Also, according to a survey conducted in 2007, 75% of total retail
investors were SIP investors.
After After After
5 years 10 years 15 years Conclusion: "One SIP at a Time"
Due to the incomparable simplicity, ease, benefits and advantages
Assumptions: Return on equity: 15% p.a., Return on money market: 9% p.a. of SIP, it is clear that this methodology is a winner for small savers
and investors. Through Systematic Investment Plans (SIP), investing
and building wealth effortlessly over a period of time can become
As is evident, it is more beneficial for small ticket SIP investors to everyone's cup of tea.
have a longer investment horizon.
Maleeha Bangash, Chief Strategy Officer, is an MBA in Investment and Finance from the
Convenience of SIP University of Chicago and has over 14 years of rich and varied international experience based
in Singapore, Pakistan, and Turkey in the areas of Investment Advisory and Finance.
The SIP technique introduces convenience to the investor. It
promotes financial discipline, allowing them to save and invest
regularly. It is an easy vehicle of investment that provides peace
of mind for small investors who find it difficult to keep constant
vigil vis-à-vis the equity and debt markets. SIPs in mutual funds
leave wealth management to the experts, and provide the investor
with peace of mind. If the investor has the risk appetite to take
a considered equity exposure, it is quite achievable to be able to
beat inflation in the long run.

SIP offers significant flexibility and can be tailored to suit the

investor’s needs. Often fund managers allow the investor to
choose an investment amount and frequency, and vary these
when needed. If for some reason the investor misses the
installment, the payment arrangement does not stop, and there
are also no charges for missing the installment. The SIP can be

FUNDAMENTALS - Investor Magazine 10

Tax Savings
through
Investments
By: Rahim Khakiani, Chief Financial Officer
As the global economy is struggling to get out of the current
recessionary cycle, it has become a challenge for most
governments around the world to manage their public finance
either through increasing the revenues or by cutting
expenditures. Since a major chunk of the government's revenue
come in the form of direct taxes, which is squeezed due to
dismal profitability of companies, thereby forcing governments
to increase tax incidents on individuals.
Pakistan is of no exception, the nation recently faced a massive
setback due to unprecedented floods, which tested its emotional
and economic strengths. While it is arguable to gauge the
Government's capacity to weather such eventuality in the future,
the tendency is clear, which is to pass on the burden to the
population in despair. The very nature of the skewed tax structure
of the country, with the tax base languishing at only around 2
million registered tax payers out of a total population of 170
million, many with considerable income at their disposal, do not
pay taxes, eventually leaving the burden on the salaried class to
manage their taxes legally. The overall tax incidence on the
salaried class is also on the rise for quite some time as can be
seen by the imposition of IDP taxes a couple of years back and
more recently when the threshold for maximum tax rate (20%)
on salaried individuals was reduced from Rs. 8.65 million to Rs.
4.55 million in the last budget.
Fortunately, Pakistani tax laws provide some relief to tax payers
in the form of tax credits and rebates, however awareness of
such benefits remain low. If the tools for tax credit and rebates
are effectively utilized, they can bring annual savings of more
than Rs. 360,000 (total tax saving for 20% tax slab) for a high
tier salaried individual drawing in excess of Rs. 4.55 million in
annual salaries and other taxable benefits and more than
Rs.132,000 (total tax saving for 10% tax slab) for individuals
drawing an annual salary of around Rs. 1.2 million.
FUNDAMENTALS - Investor Magazine
The Finance Act, 2010 also removed the exemption available on
capital gains on listed securities including mutual funds, though
there are avenues open to minimize or avoid its incidence. From
a pure legal perspective, section 37A has been inserted in the
Income Tax Ordinance, 2001 to make way for capital gains taxes.
Though the income from this source is made taxable from the
current financial year, beginning from July 01, 2010, their incidence
has been kept low and only short-term capital gains are being
charged to tax currently. As per the amendments in tax laws,
individuals realizing capital gains with a holding period of less
than 6 months have to pay 10% on such gains, while for a
holding period of between six months and one year, the same
would be taxable at 7.5% on such gains. For a holding period
of over a year, capital gains are not taxable.
The same tax principles are applicable on mutual funds, with
the only difference that the tax on capital gains on mutual funds
are subject to be withheld by asset management companies.
An individual, while filing his/her return of income for that year
can adjust the losses under this head and determine their final
tax liability. In case of any unabsorbed losses under this head,
the same are not allowed to be carried forward to the subsequent
years.
As by now you are aware that capital gains are treated as a
separate block of income as defined in the income tax laws and
are subject to maximum 10% on the gains, the tax incidence is
still very low considering the corporate tax rate of 35% and
maximum tax slab of 20% for the salaried individual.
While having considered the current tax scenario in Pakistan,
let’s take a look at how an individual investor can reduce his or
her tax liability by investing smartly.
11
An illustration to show how you
can get the most out of your
investments by availing tax
savings.

Let’s consider the example of Mr. Hypothetical who earns an annual salary of Rs. 1.2 million. His profile is as follows:

Age: 35 years
Annual income: Rs. 1.2 million, growing @ 10% per annum
Annual expenditure: Rs. 0.84 million, growing @ 15% per annum
Current savings: Rs. 2 million, placed in a PLS Saving Bank Account earning interest @ 8% per annum
Annual donations to approved charitable institutions: Rs. 0.05 million
Annual mark-up on house loan: Rs.0.30 million

Investment possibilities: His savings can be placed in bank deposits, in mutual funds and pension funds
in accordance with his risk profile and financial planning can be done based on the
His risk profiling determines following scenarios:
his asset allocation as
follows: Scenario 1 Scenario 2 Scenario 3
He continues with He invests in mutual He invests in
Equities: 25% his current saving funds and pension mutual funds and
Money Market: 75% habit by placing funds as per his risk pension funds as
the money in profile without per his risk profile
Estimated Return: PLS Saving claiming tax with tax
Account @ credit / rebates. credit / rebates.
8% per annum.
For Equities: 25%
For Money Market: 12% Rupees in millions
Overall Return: 14%* Annual Income 1.2 1.2 1.2
Annual Expenditure 0.96 0.96 0.96
Current annual savings 0.24 0.24 0.24
Current net worth:
* Weighted Average Return on
Investments Bank account 2 - -
Equity funds 0.5 0.5
Money market funds - 1.5 1.5
2 2 2
Tax credits and rebates:
Mutual funds - - 0.012
Pension funds - - 0.024
Markup - house loan - - 0.030
Charitable Institution - - 0.005
- 0.071
Investment value:
After 5 years 4.840 6.273 6.784
After 10 years 7.452 13.039 14.572
After 15 years 6.149 20.477 24.062
Islamic Saving Options
The crux of Islamic investments is sharing
of risk and exclusion of fixed or
pre-determined interest products.
In Islamic finance, profits only come at the
cost of risk exposure but excessive risks
and uncontrollable and uncertain obligations
are also forbidden.
Islamic banking has seen some vibrant years in recent past
whereby it received due recognition with a commendable double
digit growth. Investors globally hold more than $1.5 trillion in
Shariah-compliant investments and there are more than 500
funds globally that comply with Islamic principles, of which one-
third of the funds were launched during the past four years - the
figure is projected to double in the coming five years. This is
despite the fact that the demand for Islamic products is still
outpacing the supply, and there a dearth of education and training
for Islamic investment managers and Shariah scholars.
Islamic Finance Products fall into two broad categories - those
that have the characteristics of Equity and those that have the
characteristics of Debt. Equity products are considered "more"
Shariah-compliant since these promote the Shariah principle that
reward should come from sharing the risk of a venture.
Nonetheless, debt products do have a place in the modern Islamic
finance industry - e.g. Profit and loss sharing bank accounts.
Islamic Equity Finance
Investment in shares of a company (without the element of
speculation or intra-day trading) is de facto Shariah compliant
since Islamic finance values equity partnership as the ideal method
of investment as long as the underlying business is compliant
with the screening criteria. However, investors are prohibited
from investing in preferred shares of stock due to the guaranteed
rate of profit they entail. Islamic equity funds have experienced
tremendous growth and have proved to be an attractive
investment vehicle for investors looking for Islamic modes of
investment.
FUNDAMENTALS - Investor Magazine
By Wahaj Aslam
Fund Manager - Siraj Islamic Funds
Investment Screening Criteria
1) Business of the investee company
The business of the investee company should be Halal.
Accordingly, investment in shares of conventional banks,
insurance companies, leasing companies, Modaraba
companies, companies dealing in alcohol, gambling
etc. are not permissible.
2) Debt to total assets
The total debt of the investee company should not
exceed 40% of the total assets. The debt here includes
all interest-based debt & interest based financing.
3) Illiquid to total assets
The total illiquid assets of the investee company as a
percentage of the total assets should be at least 20%.
4) Investment in non-Shariah compliant
activities and income from non-Shariah
compliant investments
The total investment of the investee company in non-
Shariah compliant business should not exceed 33% of
the total assets. The income from non-Shariah compliant
investment should not exceed 5% of the gross revenue.
Subsequently, giving the proportionate portion of non-
compliant income to charity is required to purify the
dividend income from these stocks.
5) Net liquid assets versus share price
The net liquid assets per share should be less than the
market price of the share. [Net Liquid Assets = Total
Assets - (Tangible Fixed Assets + Inventory) - Liabilities]
13
Islamic Debt Finance (Deposits)
Profit and loss sharing (PLS) is the ideal business form in Islamic
finance since it promotes equity and the sharing of risk and
reward (partnership is highly regarded in Islamic financial Fiqh)
between parties. There are two main forms of partnerships in
use namely Modaraba and Musharaka. These two structures are
used by Islamic banks in savings accounts.
Islamic banks offer two kinds of deposits: Current accounts and
Investment accounts. Current accounts are similar to those offered
by conventional banks. The deposited capital is guaranteed and
made available to the client at any moment whereby no reward
or return is paid on deposits. They are mainly used for transaction
and safety purposes and deposits are accepted on the concept
of Qard / Loan.
In contrast, Investment deposits or conversely Term Deposits
based on the principles of Partnership (Modaraba or Musharaka)
must remain with the bank for a certain, previously agreed,
period (majority of Islamic Financial Institutions have now
successfully launched PLS daily product deposits). Investment
accounts are based on trust financing. The depositor is the
financing partner, while the bank is the managing partner. The
bank pools all investment deposits and searches for suitable
investment opportunities. The return on investment (positive or
negative) is then shared with the depositors, after the bank has
deducted its own costs and a previously agreed fee for its efforts.
In the event the investment is not profitable, the depositors share
the loss. Their maximum liability is the deposited sum. Investment
deposits can only be withdrawn prematurely by paying a certain
fine.
Modaraba
A Modaraba is a silent partnership between investors, or
sleeping partners (known as the rabb-al-mal) who provide
capital to an agent (the mudarib) who acts on their behalf
and invests the capital on behalf of the investors. The
investors and the agent share the profits of a venture (if
any) according to a predetermined ratio. The mudarib may
only use the funds for purposes that are explicitly defined
in the contract. At the conclusion of the Modaraba
transaction, the mudarib must return the principal and the
predetermined share of profit to the investors.
Musharaka
The Musharaka is a full contractual partnership formed to
pursue a specific line of business or project. The project
can be a new venture or an existing one that requires
additional capital. In contrast to the Modaraba, a Musharaka
allows each partner to contribute capital (i.e. each partner
in the Musharaka receives an equity stake in the venture)
and to jointly share in the profits and losses of the venture.
Another key difference between the two contracts is that
in the Musharaka each partner not only contributes capital,
but also contributes some amount of labor.
Murabaha (Cost Plus)
This concept refers to the sale of goods at a price, which
includes a profit margin agreed to by both parties. The
purchase and selling price, other costs and the profit margin
must be clearly stated at the time of the sale agreement.
The investor is compensated for the time value of its money
in the form of the profit margin. This is a fixed-income loan
for the purchase of a real asset (such as real estate or a
vehicle), with a fixed rate of interest determined by the
profit margin.
FUNDAMENTALS - Investor Magazine
When considering Islamic investment options, the following
summarizes the saving options available in the market place:
Islamic Certificates of Investments
Certificate of Islamic Investment are offered by Islamic banks in
various tenors ranging from one (1) month to five (5) years. In
the prevailing environment, the average rate for a tenor of 6-
months and an investment of below Rs. 10 million is around
7.62% p.a.
Sukuk (Islamic Bonds)
Sukuk, one of the most popular investment instruments may be
understood as a Shariah compliant 'Bond'. In its simplest form
Sukuks represent ownership of an asset and not just a claim to
the cash flow.
A Sukuk can be of many types depending upon the type of Islamic
modes of financing and trades used in its structuring. However,
the most important and common among those are Ijarah, Shirkah,
Salam and Istisna. Ijarah Sukuk is the most popular structure and
has been recently launched by the Government of Pakistan as
well. These Sukuks represent ownership of equal shares in a
rented real estate, right to receive the rent and dispose of their
Sukuk in a manner that does not affect the right of the lessee,
i.e. they are tradable. The holders of such Sukuks bear all cost of
maintenance and damage to the real estate. Ijara Sukuks issued
by the Government are now available to individual investors as
well since the State Bank has instructed banks to offer "Investor
Portfolio Securities Account (IPS)" to its clients.
Real Estate
Investing in real estate is fundamentally one other permissible
form of Islamic investment. Therefore, buying, maintaining,
leasing, and selling real estate via which an income is generated
is acceptable in the eyes of the Shariah. Real estate and property
development is a key industry in the Middle East, the Arab world,
and the Muslim world which requires a substantial amount of
capital and may not be feasible or efficient for many investors.
Consequently, investing in a Real Estate Investment Trust (REIT)
is a more suitable option.
Real Estate Investment Trust
A REIT is an entity that invests in different kinds of real
estate or real estate related assets. The properties can be
of a residential nature, or be commercial real estate
properties, such as offices, hotels, and malls.
Shariah Advisory Board
"Shariah Advisory Board (SAB)" is a regulatory body that
supervises and ensures that the Islamic financial institutions
perform their operations according to the Islamic law. Shariah
supervision and approval is the main differentiating factor
between a conventional and an Islamic instrument. An SAB
comprises of appropriately qualified scholars to determine
the relevant rules for financial transactions. Ideally the role
of a Shariah advisor comes into play from the time of
development of an Islamic product or service, to its launch
and throughout the period it is offered. The Board provides
their opinion on compliance by issuing a Fatwa (an Islamic
legal opinion) which is a stamp of approval for an Islamic
investment
14
Global
Investment
Performance
Standards
(GIPS)
By Aly Osman
Head of Compliance &
Internal Audit
“It takes 20 years to build a reputation and five minutes
to ruin it. If you think about that, you’ll do things differently.”
Warren Buffett
Performance is an investment manager’s calling card. It is what
keeps clients and wins new ones. The ability to promote a firm’s
performance is a competitive necessity and equally essential is
that clients and prospects can also trust the integrity and fairness
of a firm’s performance claims.
That is why the CFA Institute implemented the Global Investment
Performance Standards or GIPS®. Based on the underlying
principle of “full disclosure and fair representation”, GIPS is just
what the name implies - a worldwide set of standards for
measuring, calculating, and reporting investment returns.
Advantages of GIPS Compliance
Institutional investors now require their portfolio managers in the
international markets to be in compliance with GIPS and often
even require verification of GIPS compliance by an independent
party, thus making GIPS the international best practice in
performance reporting.
FUNDAMENTALS - Investor Magazine
There are two major advantages to complying with GIPS and
getting third-party verification. One is the additional credibility
the claim of compliance brings to performance numbers in sales
presentations, advertising, media relations, and marketing
literature. This added credibility can help reinforce existing client
relationships and open doors to more potential clients. A second
advantage is that GIPS compliance provides a framework that
helps strengthen a firm’s internal control structure. Processes run
smoother and portfolios are managed more cohesively as a result
of established policies and procedures.
GIPS Compliance requires Firm’s to learn the GIPS standards,
implement new processes and controls, and understand the
intricacies of creating portfolio composites. This initiative requires
an investment of time, labor, resources, and commitment. The
price of GIPS compliance, however, is far outweighed by the
potential costs of noncompliance that may be fewer growth
opportunities, damage to a firm’s reputation by not keeping up
with the industry international best practices, and ultimately, lost
business.
15
Non-compliance with the standards may suggest a weaker
commitment to ethical standards or weak internal controls
insufficient to claim compliance. If performance measurement
controls are not a ‘best practice’ this may be an indication that
other controls within the firm are weak.
Investors should require their managers claim compliance with
GIPS; it is really a question of basic hygiene. If firms do not claim
compliance either:
- their controls and procedures are so weak they cannot achieve
compliance, or;
- they are ignorant of the standards or not yet convinced of the
benefits
For asset managers the advantages are less obvious and of course
there is the cost of compliance to be offset, however the following
advantages significantly outweigh the cost of GIPS compliance.
- Competitive Advantage
- Level Playing Field – International Passport
- Increased Professionalism
- Risk Control
- Business efficiency and data quality
The advantages of GIPS for investors are obvious; they can select
asset managers based on good quality information with
confidence that the performance numbers presented are a fair
and honest representation of that firm’s track record as well as
being consistent, comparable and transparent. GIPS Standards
prevent firms from:
- Cherry picking of accounts/portfolios or time periods
- Use of inappropriate benchmarks
- Inadequate disclosures
Creating and Managing Composites
The key provision of GIPS is the requirement to include all of a
firm’s fee-paying, discretionary portfolios in meaningful
composites. Creating composites is the crucial first step towards
GIPS compliance. Firms that are contemplating GIPS compliance
will need to set up composites and have a system in place for
managing them well in advance of actually claiming compliance.
Composites are aggregates of portfolios that share common
investment objectives or strategies. The composite return is the
asset weighted average of the returns of all the portfolios in the
composite. The goal of composites is to ensure “apples to apples”
performance comparability from one firm to another and prevent
cherry picking of only a manager’s best performing accounts.
Constructing and maintaining composites is perhaps the second
greatest challenge and the one that consumes a lot of time and
resources in GIPS compliance, while formulation of GIPS Policy
Framework is probably the foremost challenge in achieving GIPS
compliance.
Managers need to define composites, select portfolios correctly,
and deal with portfolios that do not fit neatly into composites
avoiding too many overly narrow composites or too few overly
broad, meaningless composites.
Conclusion
Adhering to the GIPS standards is in the best interest of any
investment firm that wants to compete effectively and fairly. It
helps the firm to build a framework for implementing industry
international best practices, while providing a competitive
advantage. Most significantly, it helps engender trust on the part
of clients and prospects.
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FUNDAMENTALS is a semi-annual magazine for existing and potential clients of UBL Fund Managers.

Date of print: January 13, 2010

Disclaimer: Information presented in this magazine was prepared based

upon information believed to be reliable and is not guaranteed by UBL
Fund Managers to be accurate, and should not be considered to be all-
inclusive. This magazine contains forward-looking statements that
involve risks and uncertainties. This material is for informational purposes
only and should not be construed as an offer or solicitation to buy or
sell securities. This information is in summary form and does not purport
to be complete. It is intended as a general guide and is not a substitute
for professional advice. The information does not take into account
your personal needs and financial circumstances and you should consider
whether it is appropriate for you.